Banks are grumpy these days. Times are already pretty bad for bankers with the economic recession, a high rate of defaulting bank loans, and a troubled mortgage market. Now one of their golden gooses has been put to rest. Banks generate a lot of profits through their credit card lending. Despite the high level of delinquencies, the ability to charge high rates and high fees when a consumer slipped up on just one little payment helped offset credit card portfolio losses. At times these practices by the credit card divisions of banks were misleading or even predatory, but it still led to substantial fees for the banks. Not anymore. Very soon banks will be more limited in the rates and fees that they can charge. Congress finally put credit card reform on their to-do list. 

Credit Card Reform Act

The House and Senate have been working hard this spring to finalize details on the credit card reform bill that was submitted to President Obama. The final version of the bill was trimmed down from the original, but the meat-and-potatoes of the requested reform is still in tact. I guess we should mention the one odd aspect of the bill. Senate Republicans successfully lobbied for inclusion of a provision to allow concealed weapons in national parks. How does a credit card reform bill cover the ability to tote guns into Yosemite? We don't know, but that's Washington DC for you.

The credit card is on target on a number of new restrictions on the credit card industry. The new rules for credit companies include:

- Rates, terms, and card changes must be easy to understand and available for review

- No rate increases on existing balances unless the account is 60 days past due.

- Rate increases for new balances require a 45-day notification period.

- No cardholders under the age of 21 unless a joint account is opened with a consenting adult

- No fees for exceeding a credit limit unless authorized by the cardholder

- Interest rates cannot be raised within the first year after a new credit card account is opened

- Credit card bills must be sent at least 21 days before the due date of the bill

Bank CD Rate Forecast

Now that we know the specifics of the reform, the next question is: How will the banks react? At first blush, we might expect a decrease in bank deposit rates from large credit card issuers like Advanta Bank or Capital One Bank. The reasoning would be that credit card lending will be more restricted now that banks are having their profits squeezed. This may be the case, but don't be so sure. The big credit card banks still have a really nice spread between the interest rates they are charging (7% to 18%) and short-term interest rates. Banks can borrow money from the Fed at next to nothing and still earn their nice spread. They can also offer bank CD rates at 3% or 4% and still make money. Now that rules have been clarified and are close to being put into law, credit card banks may focus more on their interest rate spread and less on fees and tricked-up rate increases. This is the optimistic view. The pessimistic view is that fewer banks will offer credit cards and rates and fees will go up for all consumers.

No matter how credit card reform changes the landscape for lending, the very highest rates on certificates of deposit should be unchanged. So while the national average may dip lower on CDs as banks are having a primary revenue source restricted, rate chasers should still be able to find high rates from online banks who are not major players in the credit card industry. Just because banks are grumpy, does not mean good CD rate deals won't still exist. It just might be from different banks than the banks that used to send you the junk mail credit card flyers.